Generating Income in a Low-Rate Environment

In this video, we explore new strategies for generating income in a low-interest rate environment. 

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Transcript

Phil Mackintosh: 

The argument for owning bonds is challenging right now, but that hasn't stopped money from flowing into them. Bonds are a safety component of a portfolio. So although bonds might not be able to go up with the rate of inflation at the same time treasuries or very secure corporate should at least come back to par, meaning that the a hundred dollars worth of funding invested into them should come back as a  hundred dollars worth of premium plus some interest. And that remains one of the best reasons to have bonds in your portfolio right now.

Adam Kramer:            

For bonds, loans and preferred stock. It's important to compare both the income and spread over treasuries to their duration years. For convertible bonds and stocks, we evaluate them to see if the both the dividend yield and valuation metrics have the potential to offer both downside protection and upside capture. At the end of the day, it all comes down to the assumptions that are getting priced into the markets. On interest rate risk, what's the federal reserve going to do and what are rates headed? On credit risk, where are we in the business cycle and what's the appropriate credit spread over treasuries? And lastly, on equity risk, what's the outlook for earnings growth and is the stock trading at the appropriate multiple?

Phil Mackintosh:          

Interest rates are multi-decade lows, but the big problem here is they're also below the rate of inflation right now. So even if interest rates stay where they are, if inflation stays where it is or goes up, you're actually going to lose purchasing power.

Adam Kramer:             

A key part of my process is to always know where we are in the business cycle and to assess the risks going forward with a top-down overlay. I also use a bottoms up security selection perspective that takes into account forward fundamentals and valuation. This way we can seek out those income oriented asset classes where too much good or bad news is priced into either the multiple, if it's a stock, or the spread if it's a bond. By doing so, we look to preserve capital more effectively, dampen volatility, and capture extra return and asset classes and securities that are mispriced.

Phil Mackintosh:          

To try and enhance the income part of your returns. You could buy stocks that pay high dividends or sell options on stock portfolios, because that lets you sell some of the upside capital gain, but also earn a yield by selling the option.

Adam Kramer:              

In a multi-asset income framework, you can seek to replicate the turnover aspect by having the flexibility to invest across the full spectrum of income-oriented asset classes. This creates the potential for better capital preservation and upside capture, regardless of what the risks may be in any given year.

Phil Mackintosh:          

If you're looking to generate income and you're not concerned about capital gains, whether your portfolio doubles in the next 10 years or not, but you're more concerned about the amount of income you can earn every month, then selling that capital gain and owning the options premium is probably a good strategy.

 

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